Forex Demo Trading May Be Bad For Your Financial Health

Since brokers began providing free forex demo accounts, forex demo trading has received a lot of attention. It is generally recommended without reservation both for beginners and for more experienced traders who want to test new systems. But is it right for all circumstances, or does it sometimes have disadvantages? Could too much forex demo trading be bad for your financial health? We look at the pros and cons of demonstration accounts so that you can make up your own mind.

First let’s look at what’s in it for the broker. Why do they let you play around with their system, using their resources, for free? The main reason, of course, is that they are hoping you will sign up for a real account. If you are a beginner, they want to get you making money on a practice account so that you get real excited about putting in your own money. If you are already trading, they want you to see how great their platform is so that you will consider switching your account.

There is nothing wrong with any of that. Practicing trading is a great way to learn. In fact, if you were to read a couple of books on forex and then start trading for real right away, pretty much anybody would tell you that you were crazy. So the main advantage of a practice account is that it lets you test out a broker’s services or a system without any risk.

The problem comes if you do not realize that there is a difference between trading virtual money and trading for real. In your demo account, you are likely to take bigger risks than you would take in real trading. If you are lucky and do well on those trades, you could become overconfident. You could think you had mastered forex trading when really you were just starting out. So you put all your savings into a live trading account, start to try to follow the same system, and bang! The risks were too high, the stress was too great, a couple of losing trades and you are wiped out.

So currency trading demos can be very useful, but they have to be used right. From the moment that you open a demo account, remember that it is very important to stay disciplined. Use a system, follow a trading plan, make a big effort to act as if that was your money. Then switch to real trading once you can see a pattern of profits and losses, with an overall gain. At that time you can open a micro account and start trading very small sums. That is the best way to use a forex demo trading account.